Technically Speaking

Corn's "If You Give a Mouse a Cookie" Scenario

Source: DTN ProphetX

December corn has been in a sideways trading pattern on its weekly chart, dating back to late July. The contract established a low of $3.58 the week of August 11 before posting a high of $3.81 the following week. The last two weeks have seen Dec corn slowly slip back toward its low, threatening to move below as it ticked $3.59 early Wednesday morning.

So what happens if the contract takes out its previous low? Technically, that would constitute a bearish breakout, regardless of recently established bullish signals in weekly stochastics. If we take the range of 23 cents ($3.81 high minus the $3.58 low), and subtract it from the breakout point ($3.58) the result is a downside price target of $3.35 (bottom side of blue rectangle). On the other hand, had the contract taken out the topside price of $3.81, the upside target would have been $4.04 (top side of blue rectangle).

The bearish threat to the market is that a move below the $3.58 level could trigger a wave of noncommercial long-liquidation selling. Last Friday's weekly CFTC Commitments of Traders report showed this group still holding a net-long futures position of 67,309 contracts (as of Tuesday, August 26), a reduction of 11,648 contracts. Given this week's sell-off it is logical to think this position will be even smaller in the next CFTC report.

But what if this group decides to go to a net-short position ahead of USDA's Supply and Demand report set for release on Thursday, September 11? A move below the $3.58 mark could be the trigger that sparks the selling that leads to the establishment of a net-short futures position that drives the market to a new low. A series of events that bring to mind a classic "If You Give a Mouse a Cookie" scenario.

What then though? If Dec corn sets a new low around the time of the report due to increased noncommercial selling, and given that weekly (and monthly) stochastics below 20% (bottom study) already indicate the market is oversold, it is possible commercial buying could lead to an end of the month upturn. At that point, it is not out of the realm of imagination that corn could, I repeat could, see a secondary bullish crossover by monthly stochastics indicating a possible change in the long-term trend.

Stay tuned, as things are about to get more interesting.

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Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.

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Comments

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andrew mohlman
9/4/2014 | 9:52 AM CDT
Seems like economic terror on farmers for a year or more.